Ask an Expert: What Goes Into a Credit Score and How to Improve It

Q: I recently opened a couple of department store credit cards and noticed a drop in my credit score. Why did this happen? What goes into a credit score and how can I improve it?

A: Dear reader, I appreciate your question because most of us overlook the long-term effects that opening new credit lines can have on our credit score. We usually think about the short-term benefits, such as getting a discount on the first purchase or receiving frequent coupons. It is great that you want to understand why this happens. As you know, your score impacts your future credit approval, interest rates, and the overall terms and conditions of any new credit. For those reasons, it is important that you always make decisions with your score in mind and think about the long-term effects on your credit.

For us to understand why your score dropped, we should start by answering the second part of your question: “What goes into a credit score?” According to MyFico.com, your score is calculated by using all the data in your report, including all the positive and negative information, that is reported by your creditors to the credit reporting agencies every month. More specifically, FICO Scores* are calculated by looking at five main categories. Each category impacts your score a bit differently. Take a look:

–Payment history (35%): This is one of the most important factors because it shows if you have paid your creditors on time or if you have missed any payments. All creditors want to know this kind of information.

– Amounts owed (30%): This factor looks at a few things, including how much you owe on all of your accounts in total, and individually on each credit card. The less you owe, the more available credit you will have and the better it is for your score.

– Length of credit history (15%): Longer credit histories usually help boost your score. This factor takes into account for how long you have had your oldest and newest account, and even how long it has been since you used some of your accounts.

– Credit mix in use (10%): It looks at the type of credits you have–credit cards, retail accounts, installment loans, mortgages, and finance companies.

– New credit (10%): Looks at how often you ask for new credit and how many new accounts you have.

Now that we have discussed what goes into your score, we can go back to the first part of your question: “Why did this happen?” As you can see, the answer is multifactorial. According to MyFico.com, research revealed that consumers who opened several credit accounts in a short time frame saw a decrease in their score because they represented a greater risk to creditors. Your lenders could have interpreted your new accounts as though it was possible you were getting more credit than you could pay back. That interpretation may not be true, and you may be planning to pay your new credit cards as you use them, but this is just a standard prediction based on the data on your credit report. Also, when you open new accounts, the average age of your accounts decreases, which affects your score even more, especially if you do not have a long credit history.

You also asked: “What can I do to fix it?” As a general rule of thumb, you can improve your credit score if you always make your payments on time, keep the amounts you owe low and refrain from opening too many credit cards in a short period. You should remember that the measure in which new credit inquiries affect your score also depends on what your current report looks like. The same goes for the other four factors that impact your score.

So, the best way for you to get a specific strategy to help you improve your credit score is to talk to a certified credit counselor. If you decide to get professional help, be aware of the fraudulent credit repair clinics that promise a quick fix. These agencies often ask for money in advance and can’t do anything that you and a certified counselor cannot do for free. You can influence and improve your credit, but it takes time and a conscious effort on your part.

* The FICO Scoring Model was created by the Fair Isaac Company and it is currently used by 90% of the lenders in the industry. The FICO Score has a range from 300–850 points. The higher the score, the less risk you represent, and the lower the score, the riskier you become and the less favorable term and conditions you will get from them, including the denial of new credit.

Sincerely,

Bruce McClary, Vice President of Communications

Bruce McClary is the vice president of communications for the National Foundation for Credit Counseling® (NFCC®). Based in Washington, D.C., he provides marketing and media relations support for the NFCC and its member agencies serving all 50 states and Puerto Rico. Bruce is considered a subject matter expert and interfaces with the national media, serving as a primary representative for the organization. He has been a featured financial expert for the nation’s top news outlets, including USA Today, MSNBC, NBC News, The New York Times, the Wall Street Journal, CNN, MarketWatch, Fox Business, and hundreds of local media outlets from coast to coast.